Consider the following diagram of the \(A E\) function and the \(45^{\circ}\) line.

a. Suppose the level of actual national income is \(Y_{1}\). What is the level of desired aggregate expenditure? Is it greater or less than actual output? Are inventories being depleted or accumulated?

b. If actual income is \(Y_{1}\), explain the process by which national income changes toward equilibrium.

c. Suppose the level of actual national income is \(Y_{2}\). What is the level of desired aggregate expenditure? Is it greater or less than actual output? Are inventories being depleted or accumulated?

d. If actual income is \(Y_{2}\), explain the process by which national income changes toward equilibrium.

Transcribed Image Text:

0 Desired Aggregate Expenditure 3 d 4.5 Y Y Actual National Income AE = Y AE